How self-managed superannuation can work for millennials
I’m sure many of you are probably thinking the following when it comes to superannuation:
“Who cares, I can’t touch it for ages anyway.”
“Superannuation is a bad investment.”
I get it, we are millennials and retirement is a long way off. That said, my mission today is to ensure you realise superannuation is, in fact, great and it’s time you take it seriously as it’ll most likely be one of your largest assets down the track (if it isn’t already).
So, what is superannuation?
Contrary to what most people believe, it’s not actually an investment, it’s an investment structure.
In simple terms, superannuation is the closest thing we have to a “tax haven” in Australia. Inside the superannuation environment, investment earnings are taxed at a flat rate of 15% and any capital gains made from the sale of investments are taxed at 15% (or 10% if the investment was held for more than a year), compared with up to 48.5% of assets held in your own name.
Now, of course when something is so great, it always comes with a catch.
The catch here, of course, is the restrictions in place on when you can access your superannuation funds (approx. age 67 for millennials), and also on how much you can contribute into your superannuation each year.
I can now hear you thinking…
“67! That’s ages away, I don’t want to think about things that far ahead, also I will probably be nearly dead by that age anyway so who cares anyway!”
“I will have made enough money by then to support myself so I’d rather use the money now for enjoyment or investing.”
“I don’t have control over my superannuation and I don’t trust the Government.”
While I hate to be blunt (actually, who am I kidding, I love being blunt!), if you think like this you’re a fool and will be regretting your views in the future.
For a 31yr old Australian today the life expectancy for a female is 82 and for a male is 79. And, as you know, you are not average! You can likely expect to live a lot longer than this. With the rapid development in medical research, there is a high chance that we’ll all live waaaay beyond 100 years and (getting kooky here) if you believe in the Singularity it could be for eternity.
Most people dramatically overestimate how much they will be worth in the future and dramatically underestimate how much they will need to support themselves.
You have complete control of your money held in the superannuation environment and can invest in most things if you know how. Super exists to help relieve the Australian Government of the burden of supporting its citizens in retirement. Although the rules will continue to change, it’s a reasonable bet that the superannuation environment will remain a more tax-advantaged environment than holding assets in your personal name, otherwise, it will simply cease to function.
Now, let me run some numbers by you:
How would you like to have $2 million in the future?
Well if you’re 31 and currently earning a salary of $120,000, have a current superannuation balance of $100,000 and you maximise your concessional contributions (pre-tax) into superannuation, at age 67 you will have a balance of $2.1 million.
To achieve this you’d need to invest $18,000 annually (you’ll be just $11,340 out of pocket after tax) each year into superannuation rather than in your own name. The way I see it, that’s a pretty small sacrifice to know that you’ll have just over $2 million in the future to support your lifestyle.
Does the knowledge that you’ll have this asset base available to you in the future start to change your views on how you live your life regarding your work, investing and spending?
Now that I’ve piqued your interest, let’s discuss what I believe is the best investment vehicle for our generation – the self-managed superannuation fund (or SMSF).
Watch the video on how millennials are embracing self-managed superannuation funds (SMSF) and how it could work for you.
In all honestly, the name itself can be a little misleading as it is pretty much impossible to manage it all yourself (it can also be pretty painful from an administrative perspective), however, let’s delve into that a bit later.
The main difference between an SMSF and an industry or retail superannuation fund that you are likely using now, is that you become the trustee of the fund and are ultimately responsible for all of the investment decisions and for keeping the fund compliant in line with the Superannuation Industry (Supervision) Act 1993 (the SIS act).
Being in charge of the fund is what makes it exciting, though.
You become completely in control of the investment strategy for the fund and can start to invest in a far broader range of things.
- Have you been wanting to buy a property but are not in a position to save a large enough deposit quickly?
Guess what – you may be able to buy a property in your SMSF.
- Do you have connections to the start-up world and see some great investment opportunities that you’d like to take advantage of but you worry about tying up your funds for a long time?
Guess what – you can invest in start-ups in your SMSF.
Both property and investing in early stage companies tend to be much longer term investments, so using your superannuation funds to make these types of investments makes a lot of sense as you’re not planning on accessing the funds for 30-40 years as it is.
You can also invest in direct shares (both local and international), debt, hedge funds and commercial property syndicates.
Suddenly superannuation sounds more exciting right?!
Like everything we talk about at WE, Sarah and I practice what we preach.
Personally, we have an SMSF worth just over $800,000 due to us getting started early and taking advantage of this opportunity.
We began maximising our concessional contributions about 5 years ago. We commenced investing in property (through a syndicate) and several start-ups, along with some more conservative shares, ETFs and managed funds. Some of these investments have been very well performing and if it had not been for superannuation, we would not have been able to take advantage of these opportunities.
Thanks to the power of compound interest, and our foresight in getting started early, we no longer need to worry about funding the second half of our lives.
I can tell you right now, this is a very powerful and comforting feeling to have. It doesn’t bother us that we can’t touch it for years. We have plenty of income earning ability and to build up our other assets.
For us, we know that we will always want to do some form of work anyway. What this means is we effectively have the option to spend every dollar we earn now. We know our futures are taken care of. Personally, this means we are no longer slaves to earning money. Now we can pursue what makes us happy and what truly benefits society.
To be clear, I’m not sharing this with you to brag.
Instead, I want to demonstrate to you how powerful having an SMSF can be. Short-term sacrifices can have huge ramifications for the rest of your very long life.
As millennials, we’re truly blessed to be learning all of this now. We’re all young enough to make the necessary changes we need to.
When we operated our private wealth management firm (looking after high net worth pre-retirees), from time to time we’d, unfortunately, come across people for whom it was simply too late to help.
If this has inspired you to take action, please take advantage of our FREE Strategy Session to find out what you need to be doing to reach your goals and live a financially free life, in line with your personal values.
Disclaimer: all information contained within this article is of a general nature. Do not rely upon it when making financial decisions. Please consult a professional financial advisor or planner (like us!) before acting.